How to tame inflation: Experts debate

The December inflation has come in at 8.4% today. This is capping the week when even the Prime Minister held several consultations. But, he was unable to propose any concrete plan to be able to bring inflation under control. Can we do anything to rectify the situation? Are we faced with fate comply?

In an interview with CNBC-TV18, PH Ravikumar, Former MD and CEO of NCDEX, and Director of Federal Bank; and Madan Sabnavis, Chief Economist of CARE Ratings joined in to discuss and debate on a solution to this rising inflation.

Below is the verbatim transcript of the interview. Also watch the accompanying videos.

Q: Are we faced with regards to food inflation which is the reason why we have seen a high number today which was higher than the last month? There was a high level of expectation from the prime minister and government that they can rein in the food inflation. All these announcements over the last two or three days has led to a severe sense of disappointment. They have not been able to propose anything concrete? What do you think of the current situation?

Ravikumar: The three major components of the food inflation are from vegetables, fruits and milk. In India, fruits are seen as a luxury items. Other than plantings, a common man is not seen to consume fruits, so the fruits are out. The third components are milk, eggs and meat. Short term supply of milk, eggs and meat has to be increased, not too many from the SAARC countries but, from the neighbouring countries. A source of increase of short supply is also possible from the Asian countries. I have not read about any attempt made to increase short term supplies in case of milk, eggs and meat and poultry items. The medium and long term steps need to be taken that we predicted three years back. We need to identify top eight to 10 agricultural commodities and have an aim for a strategic plan for next five to seven years; so that for next 15 years, we do not have a short supply.

For example, Canada grows peas only for the Indian markets. They studied our market and determined that we are perennially short of pulses. Canada has a part of temperate and cold climate. The grow pulses solely for the Indian market and are one of the largest exporters of pulses to India. I do not see a reason why we can not do anything as we do separate silos. In an agricultural production, you have process of production, storage, distribution and then consumption. We need to take eight to 10 commodities as an integrated approach and address the needs for the next 15-20 years. I am happy that this discussion is taking place before the current budgetary announcement by end of February. If you look at the cold storage, out of 25 million tonnes of cold storage capacity, 24 millions is for potatoes. 30% to 70% of vegetables produced are destroyed and they do not reach the consumption point. They need huge investments and fiscal support.

Q: Several of solutions that you are suggesting do not seem to be deeply scientific. The medium to long solutions have not been addressed till now. Maybe, this inflation situation might spur the government into doing something about it, but their result will be visible only after one, two, three, four or five years down the line. Could you suggest some short solution outside of milk and eggs? Is there anything else that the government can do to bring some relief to the situation in the shorter-term?

Ravikumar: To bring some relief to the situation for short term, we should import from Africa. If Canada can export vegetables to the entire Europe, then why cannot export vegetables to India. Asian countries like Philippines and Vietnam are strong growers of vegetables, poultry and meat items. They can supply us with their vegetables and poultry items as we need them. The short term supply is the only solution because the supplier of vegetables coming up in the next three-four months, in February or March. Till that time, we have to live with the current high prices.

Q: What do you have to say about the fact that we have seen no conversation with regards to short term solutions? The import of onions from Pakistan also ran into hurdles? We are dealing with problems that we are facing which needs to be resolved quickly enough?

Sabnavis: The sad part is that nothing can be done in the short run. To an extent the statement which the government released yesterday, was a very honest and sad one.  Instead of trying to reassure that things are going to get under control, we should know that nothing will be done in the next month or so.

Q: Do you not agree with Mr Ravikumar on some shorter term measures that he suggested? He said that shorter term measures like getting imports from other countries will help us to elevate the situation to some degree?

Sabnavis: Yes, but only theoretically. In way our machinery works with the time lag, we had a problem with wheat. By the time, we had the contract tendered and accepted, and the wheat was shifted in the country. It was a long time period. So, if they are importing vegetables and fruits from the countries that can provide it, they will take a very long period of time. By that time we will have our own crop grown in February or March. So theoretically, it is a very good idea, but I am not sure of what it will cost. 5 years back, we had a case of importing wheat. We imported wheat by higher cost than which was readily available within the country. The whole issue was that we did not have enough wheat stocks. We have a lot of vegetables being grown here, but around 30% of it gets rotten. So, this is a medium term solution.

Q: Do you mean that if there is no short term solution, we have no option but to face inflation at these current levels? At one point, the finance minister said that he hoped that it would come down at 6% in March. Do you see any indication of that as currently everybody is raising their inflation targets?

Sabnavis: No. When, they were talking of the 7% coming down, it was with a hope and a high base rate of last year. We had a drought last year, so the numbers are expected to come down. Instead of focusing on the wholesale price index (WPI) inflation, let us look at the food inflation part. The food inflation will remain at a double digit mark as we move towards March. So, while the manufactures have a higher weightage in the WPI, it would theoretically bring its inflation number down to something 6.5-7%. Food inflation will continue to be high and wait till we have the next good crop.

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Q: What does this mean for growth prospects for this economy in the course of this year? Both, from the point of view of agricultural growth contribution as well as if inflation stays at this level, everyone is going to call for bigger rate hikes from the RBI. Will this potentially hurt corporate growth and industrial growth as well?

Ravikumar: Absolutely. I see no solution except for any countries which can provide us with the short term solution. If you look at the Satyam case, which had a political weight, the matter was handled and closed in 100 days. It affects a majority of population at a lower spectrum of the customer segmentation. If there is a political will, it can be achieved to augment short term sources of supply. The stock markets indicate the interest rates hike in the high levels of inflation. This would impact capital formation and investment because it would get the entrepreneurs to get new facilities. I do not see a solution for inflation in the next 4 to 6 months. We have to wait for the RBI to comment for some pressures. The only silver lining is the last year